ESU, PASSHE rebut union-backed report

Charges of financial mismanagement are unfounded

A report released last week alleging the Pennsylvania State System of Higher Education has allowed its universities to mismanage their budgets was poorly prepared, East Stroudsburg University officials contend.

Harrisburg — Pennsylvania State System of Higher Education (PASSHE) Chancellor Frank T. Brogan today distributed to the Board of Governors and university presidents the following statement in response to the recent study of System finances conducted for the faculty union:

"Although it was not shared directly with us, we have now had the opportunity to review the report on PASSHE finances prepared for the Association of Pennsylvania State College and University Faculties (APSCUF) by the accounting firm of Boyer and Ritter. Because there are obvious errors, I wanted to correct the record, not only on the report's content, but also on the unsubstantiated statements and mischaracterizations contained in the news release issued by APSCUF leadership in relation to the report.

"It cannot be overemphasized how seriously PASSHE leadership—which includes the Chancellor, Board of Governors, university presidents and the members of the individual university councils of trustees—takes its responsibility to be good stewards of all of the taxpayer-supported funds we receive from the Commonwealth as well as those derived from student tuition and fees cannot be overemphasized.

"APSCUF President Steve Hicks' statement that "PASSHE has been allowing the fourteen state-owned universities to mismanage their budgets" could not be further from the truth. In fact, our budget process is thorough, transparent and professional. We believe the findings in the report demonstrate a clear misunderstanding of our procedures by Boyer and Ritter.

"Each October, the PASSHE Board of Governors reviews and approves the State System's annual appropriations request, which is then submitted to the governor's budget office. This submission forms the core of PASSHE's annual budget proposal and includes System priorities that are presented to the House and Senate Appropriations Committees during the annual budget hearings.

"Once the Commonwealth's budget is adopted, the Board approves a final budget for PASSHE, reflecting both the state appropriation and new tuition rates for the next academic year. By its very nature, this process is fluid, which results in several different budget adjustments being made throughout the year.

"The university presidents have the statutory responsibility to prepare their respective institution's individual budget, which is then submitted to the Board for approval. Each university budget also must be approved by its individual council of trustees. Mid-year budget updates are submitted in March and necessary revisions are made based on actual student enrollments and revenue (tuition and fee) collection.

"At the end of each fiscal year, all of the individual budgets (the overall System budget and each university's budget) are audited by an outside, independent auditing firm.

"If the assertions made in the APSCUF report had any validity, they also would apply to every school district, state agency and virtually any other entity that receives financial support from the Commonwealth.

"It is well documented, including in this report, that for the past two years the amount of state funding PASSHE has received has remained flat, while expenses have continued to rise.

"It is hard to believe that the APSCUF-funded report fails to include the impact of either the salary or benefit increases incurred by the System primarily as the result of new collective bargaining agreements finalized within the last year. Also not considered were the higher costs of pensions. These increases are only partially offset by the 3 percent tuition increase the Board of Governors approved for the current academic year, requiring the universities to manage an overall deficit of more than $50 million.

"Dr. Hicks also stated that PASSHE is "hiding debt in affiliated corporations." There is no data nor narrative in the report to support this claim.

"The information APSCUF claims is being hidden is, in fact, included in the report, which is based on financial records provided by PASSHE. The information, which is related to the financing of the construction of student housing, is included in each of the university's annual financial statements and is routinely shared with all of the credit-rating agencies that regularly review PASSHE finances. This information has always been publicly available.

"Although APSCUF leadership has participated in briefings in which it has been clearly explained that the construction, operation and maintenance of student residence halls are funded by student housing fees, APSCUF continues to incorrectly state that these facilities are supported by university operating funds and that this affects the academic budgets of the universities. That simply is not true. Tuition dollars and PASSHE's annual state appropriation are not used to fund student housing, nor any other auxiliary operation.

"On the positive side, the report clearly demonstrates support for what the leadership of PASSHE has been saying for the past several years: that students are seeking new courses and programs and that enrollments in some of the more traditional fields are dropping. In order to remain relevant, and to best serve students and the Commonwealth, the PASSHE universities need to continually update and realign their academic offerings.

"APSCUF does acknowledge that the report was commissioned to address faculty realignment on several PASSHE campuses.

"A little less than 1 percent of our faculty complement did receive letters notifying them of possible furlough, an action made necessary to help ensure the relevancy and long-term viability of our universities.

"Unequivocally, the university presidents, the individual councils of trustees, the Board of Governors and the chancellor are committed to sound financial management practices as they seek to ensure students receive high-quality educational experiences even as the State System and its leaders address a myriad of challenges resulting in part from level state funding, minimal tuition increases and rising personnel costs."

The Pennsylvania State System of Higher Education is the largest provider of higher education in the Commonwealth, with about 112,000 students. The 14 PASSHE universities offer degree and certificate programs in more than 120 areas of study. About 500,000 PASSHE alumni live and work in Pennsylvania.

The state-owned universities are Bloomsburg, California, Cheyney, Clarion, East Stroudsburg, Edinboro, Indiana, Kutztown, Lock Haven, Mansfield, Millersville, Shippensburg, Slippery Rock and West Chester Universities of Pennsylvania. PASSHE also operates branch campuses in Clearfield, Freeport, Oil City and Punxsutawney and several regional centers, including the Dixon University Center in Harrisburg and the Philadelphia Multi University Center in Philadelphia.

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A report released last week alleging the Pennsylvania State System of Higher Education has allowed its universities to mismanage their budgets was poorly prepared, East Stroudsburg University officials contend.

Ken Long, ESU's vice president of finance and administration, said his accounting group is reviewing the document, but said that it appears that the accounting firm that researched the report on behalf of the faculty union used "less than effective accounting practices" in its approach.

"It's not something I'd expect from a reputable accounting firm, such as this one appears to be," Long said of the 165-page report prepared by Boyer & Ritter.

Long said his team plans to provide its own analysis, based on the report, that it will present to ESU's Council of Trustees at a later date.

Pennsylvania State System of Higher Education Chancellor Frank T. Brogan released a lengthy statement on the report Friday night.

"It cannot be overemphasized how seriously PASSHE leadership — which includes the chancellor, Board of Governors, university presidents and the members of the individual university councils of trustees — takes its responsibility to be good stewards of all of the taxpayer-supported funds we receive from the Commonwealth as well as those derived from student tuition and fees," the statement reads in part.

"(A statement by faculty union President) Steve Hicks that PASSHE has been allowing the 14 state-owned universities to mismanage their budgets could not be further from the truth. In fact, our budget process is thorough, transparent and professional. We believe the findings in the report demonstrate a clear misunderstanding of our procedures "»" (Go to poconorecord.com to read the statement in full.)

Lisa Meyers, the principal certified public accountant who worked on the report, declined to comment Friday, citing the code of ethics an accounting firm signs when preparing a report for a client.

That code prevents the company from discussing it with anyone other than the client who authorized the report.

According to the report, data available for analysis consisted of audited external financial statements, internally prepared financial reports, budget reports submitted to the Pennsylvania State System of Higher Education, full-time equivalent enrollment figures, annual enrollment per major and tuition rates.

The financial reports include detailed balance sheets, statement of revenues, expenses and changes in net assets (deficits), and statements of cash flows.

In order to verify accuracy and appropriateness of the financial reports, B&R compared summary data provided on the financial report to the corresponding external financial statements.

"The final phases of evaluation were to compare budget to actual significant areas of revenues, expenses and operating net income (losses)," the report says.

"I'm perfectly comfortable with the report and what's in it, and with the professionalism of Boyer & Ritter. I think anyone who looks at the report, even the least bit carefully, can tell it's very professionally done," Hicks said in a phone message Friday. "If there's problems with the data, it's all PASSHE data, and that's an internal problem with PASSHE, not a problem with the report."

The report focused on ESU as well as Cheyney, Clarion, Edinboro, Kutztown, Mansfield and Slippery Rock.

Fiscal years 2009 through 2012 were analyzed. The most recent fiscal year, which ended June 30, 2013, was analyzed to the extent information was available.

ESU wrote off $4.4 million in bad debt expense during 2012-13, according to the report.

"This appears to be extraordinary based upon historical data available for the fiscal years 2008-09 through 2012-13," the report says.

Asked about the write-off, Long said each year the university has an allowance for "doubtful accounts."

Some students enroll but don't pay their tuition, which becomes a debt the university ends up writing off, he said.

The amount can usually be anticipated based on prior years' data, but because of steep declines in student enrollment, the university experienced an especially large deficit, he said.

That write-off is not contributing to the $7 million deficit university officials are anticipating in 2014-15, he said.

The report also said that University Property Inc., a component unit of the university, has an unrestricted net deficit of $2.4 million. UPI is a separate, nonprofit entity set up to manage student housing at ESU, Long said.

Any housing fees paid by students go toward paying off the debt of the housing, Long said, which is why UPI has such a high debt ratio. As more money from housing fees comes in, that debt will gradually go down.

"It's like a mortgage, and over time you pay your mortgage off," Long said.

Long would not comment on other aspects of the report Thursday, saying he was still reviewing it.